The UK is at a key inflection point regarding sustainable finance and, after years of being ranked number one on the Global Green Finance Index, its position is under threat, according to a report published by the UK Sustainable Investment and Finance Association (UKSIF).
Financing the Future: Financial Services calls for supportive policies and regulation in three key areas to strengthen the UK’s sustainable finance sector, and to create a more attractive environment for the growth of sustainable finance and private investment at large.
As part of the research, UKSIF surveyed 100 financial services organisations representing approximately £1trn in annual turnover and over £200bn in green investments in the UK. While 83% of those surveyed expressed that the UK is still their top market for sustainable finance activity, lack of government clarity and supportive policy is creating a clear direction of travel, with two in three (65%) saying that they already have or plan to move investments out of the UK to a market that is more supportive of their sustainability goals.
The research showed 95% of respondents would increase investment in the UK either through new projects (40%), existing projects (34%) or both (21%) if favourable policies were implemented. From those surveyed alone, this would represent a potential shift of an estimated £100bn in assets under management.
James Alexander, CEO at UKSIF, commented: “The UK is facing a crucial inflection point that could see it either close the remaining gaps and benefit from the great strides we have taken in our global leadership on sustainable finance to date; or lose its hard-won position as a leader.
“The recent flipflopping on wider sustainability policies and the continued absence of detailed policy frameworks for various sectors, alongside secondary factors such as a lack of clarity from policymakers in creating a clear and stable financial services regulatory framework, is helping drive away much needed private capital into the UK that can help progress the country towards net zero.”
Key policy areas
The first of the three key policy areas recommended by UKSIF is to deliver a clear and world-leading sustainability disclosure regime. Critical steps should include adopting the International Sustainability Standards Board (ISSB) standards, introducing mandatory corporate transition plans and, crucially, a UK green taxonomy.
According to the report, 68% of finance companies agree that SDR will help increase their investment in sustainable finance in the UK.
Second, the fiduciary duty of pension schemes should be clarified to empower investors. UKSIF calls on the Pensions Regulator to issue clarification to make it clearer to pension schemes that factoring in financially material ESG issues and actively managing associated risks and impacts is consistent with fiduciary duties.
The report suggested the clarification of fiduciary duties from policymakers would address the lack of clarity in the market that has arguably contributed to a more risk-averse culture of investing in the UK. Additionally, it calls for investment consultants to be brought under formal FCA regulatory scope.
Some 72% of large finance firms in the UK said that clarity of fiduciary duty concerning ESG for UK Pension Schemes Trustees would help them in making investment decisions.
Third, regulators should embed biodiversity into their frameworks. If the UK is to meet its commitment to halt nature loss by 2030 and meet international commitments, policymakers and regulators must turn their focus beyond climate change risks alone, according to UKSIF.
Therefore, UKSIF calls on the government to look to the incorporation of the Taskforce on Nature-related Financial Disclosures (TNFD) framework, specifically through the support of the creation of a new ISSB standard for biodiversity and nature, IFRS S3. A new biodiversity-specific standard, it argued, will better support financial services firms and companies in the UK and globally to address the financial risks posed by damage to the world’s biodiversity and reduce the economic impact on GDP.
Over three in five (61%) finance firms support the incorporation of the TNFD framework into UK regulation.
